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on Risk Management |
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Issue of 2013‒12‒15
thirteen papers chosen by |
| By: | Marc Busse (SCOR SE - SCOR SE); Michel Dacorogna (SCOR SE - SCOR SE); Marie Kratz (SID - Information Systems / Decision Sciences Department - ESSEC Business School, MAP5 - Mathématiques appliquées Paris 5 - CNRS : UMR8145 - Université Paris V - Paris Descartes) |
| Abstract: | Risk diversification is the basis of insurance and investment. It is thus crucial to study the effects that could limit it. One of them is the existence of systemic risk that affects all the policies at the same time. We introduce here a probabilistic approach to examine the consequences of its presence on the risk loading of the premium of a portfolio of insurance policies. This approach could be easily generalized for investment risk. We see that, even with a small probability of occurrence, systemic risk can reduce dramatically the diversification benefits. It is clearly revealed via a non-diversifiable term that appears in the analytical expression of the variance of our models. We propose two ways of introducing it and discuss their advantages and limitations. By using both VaR and TVaR to compute the loading, we see that only the latter captures the full effect of systemic risk when its probability to occur is low. |
| Keywords: | Diversification; Expected Shortfall; Investment Risk; Premium; Risk Loading; Risk Management; Risk Measure; Risk Portfolio; Stochastic Model; Systemic Risk; Value-at-Risk |
| Date: | 2013–11 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:hal-00914844&r=rmg |
| By: | Jaume Belles-Sampera (Faculty of Economics, University of Barcelona); Montserrat Guillén (Faculty of Economics, University of Barcelona); Miguel Santolino (Faculty of Economics, University of Barcelona) |
| Abstract: | A new family of distortion risk measures -GlueVaR- is proposed in Belles- Sampera et al. (2013) to procure a risk assessment lying between those provided by common quantile-based risk measures. GlueVaR risk measures may be expressed as a combination of these standard risk measures. We show here that this relationship may be used to obtain approximations of GlueVaR measures for general skewed distribution functions using the Cornish-Fisher expansion. A subfamily of GlueVaR measures satises the tail-subadditivity property. An example of risk measurement based on real insurance claim data is presented, where implications of tail-subadditivity in the aggregation of risks are illustrated. |
| Keywords: | quantiles, subadditivity, tails, risk management, Value-at-Risk. JEL classification: |
| Date: | 2013–12 |
| URL: | http://d.repec.org/n?u=RePEc:ira:wpaper:201323&r=rmg |
| By: | Dominique Guegan (Centre d'Economie de la Sorbonne); Bertrand K. Hassani (BPCE et Centre d'Economie de la Sorbonne) |
| Abstract: | Following Banking Committee on Banking Supervision, operational risk quantification is based on the Basel matrix which enables sorting incidents. In this paper, we deeply analyze these incidents and propose strategies for carrying out the supervisory guidelines proposed by the regulators. The objectives are as follows. On the first hand, banks need to provide a univariate capital charge for each cell of the Basel matrix. On the other hand, banks need also to provide a global capital charge corresponding to the whole matrix taking into account dependences. This paper proposes several solutions and attracts the regulators and managers attention on two crucial points: the granularity and the risk measures. |
| Keywords: | Operational risks, Loos Distribution Function, risk measures, EVT, Vine Copula. |
| JEL: | C18 |
| Date: | 2011–09 |
| URL: | http://d.repec.org/n?u=RePEc:mse:cesdoc:11053r&r=rmg |
| By: | Magdalena Pisa; Dennis Bams; Christian Wolff (LSF) |
| Abstract: | This paper generalizes the existing asymptotic single-factor model to address issues related to industry heterogeneity, default clustering and capital requirement s parameter uncertainty in US retail loan portfolios. We argue that the Basel II capital requirement overstates the riskiness of small businesses even with prudential adjustments.Moreover, our estimates show that both location and spread of loss distribution bare uncertainty.Their shifts over the course of the recent crisis have important risk management implications. The results are based on a unique representative dataset of US small businesses from 2005 to 2011 and give fundamental insights into the US economy. |
| Keywords: | Retail credit risk, default correlation, multiple defaults, generalized method of moments |
| JEL: | C51 G32 E44 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:crf:wpaper:12-19&r=rmg |
| By: | David Allen; Michael McAleer (University of Canterbury); Robert Powell; Abhay Singh |
| Abstract: | In this paper, we develop a new capital adequacy buffer model (CABM) which is sensitive to dynamic economic circumstances. The model, which measures additional bank capital required to compensate for fluctuating credit risk, is a novel combination of the Merton structural model, which measures distance to default, and the timeless capital asset pricing model (CAPM) which measures additional returns to compensate for additional share price risk. |
| Keywords: | Credit risk, Capital buffer, Distance to default, Conditional value at risk, Capital adequacy buffer model |
| JEL: | G01 G21 G28 |
| Date: | 2013–10–16 |
| URL: | http://d.repec.org/n?u=RePEc:cbt:econwp:13/35&r=rmg |
| By: | Hurlin , Christophe; Perignon, Christophe |
| Abstract: | We identify a potential bias in the methodology disclosed in July 2013 by the Basel Committee on Banking Supervision (BCBS) for identifying systemically important financial banks. Contrary to the original objective, the relative importance of the five categories of risk importance (size, cross-jurisdictional activity, interconnectedness, substitutability/financial institution infrastructure, and complexity) may not be equal and the resulting systemic risk scores are mechanically dominated by the most volatile categories. In practice, this bias proved to be serious enough that the substitutability category had to be capped by the BCBS. We show that the bias can be removed by simply standardizing each input prior to computing the systemic risk scores. |
| Keywords: | G-SIFI; regulatory capital; Basel Committee |
| JEL: | G21 |
| Date: | 2013–10–09 |
| URL: | http://d.repec.org/n?u=RePEc:ebg:heccah:1005&r=rmg |
| By: | Thorsten Lehnert; Lamia Bekkour; Xisong Jin; Fanou Rasmouki; Christian Wolff (LSF) |
| Abstract: | In this paper, we empirically investigate the impact of the credit risk of Eurozone member countries on the stability of the Euro. In practice, in the absence of eurobonds, euro-area credit risk is induced though the credit default swaps of the member countries. The stability of the euro is examined by decomposing dollareuro exchange rate options into the moments of the risk-neutral distribution. We document that during the sovereign debt crisis changes in the creditworthiness of member countries have significant impact on the stability of the euro. In particular, an increase in member countries credit risk results in an increase of volatility of the dollar-euro exchange rate along with soaring tail risk induced through the riskneutral kurtosis. We find that member countries credit risk is a major determinant of the euro crash risk as measured by the risk-neutral skewness. We propose a new indicator for currency stability by combining the risk-neutral moments into an aggregated risk measure and show that our results are robust to this change in measure. Noticeable is the fact that during the sovereign debt crisis, the creditworthiness of countries with vulnerable fiscal positions is the main riskendangering factor of the euro-stability. |
| Keywords: | European sovereign debt crisis, currency options, credit default swaps, currency stability, risk-neutral distribution, crash risk, tail risk. |
| JEL: | G13 F31 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:crf:wpaper:12-4&r=rmg |
| By: | Maarten van Oordt; Philip Stork; Casper de Vries |
| Abstract: | Price risk is among the most substantial risk factors for farmers. Through a two-sector general equilibrium model, we describe how fat tails in agricultural prices may occur endogenously as a result of productivity shocks. Using thirty years of daily futures price data, we show that the returns of all agricultural commodities in our sample closely follow a power law in the tail of their distributions. We apply Extreme Value Theory to estimate the size and likelihood of the highest losses a farmer may encounter. Back-testing verifies the validity of these risk measurement methods. |
| Keywords: | Agricultural commodities; extreme value theory; heavy tails; risk management |
| JEL: | C14 Q11 Q14 |
| Date: | 2013–11 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:403&r=rmg |
| By: | Susanne Emmer; Marie Kratz; Dirk Tasche |
| Abstract: | Expected Shortfall (ES) has been widely accepted as a risk measure that is conceptually superior to Value-at-Risk (VaR). At the same time, however, it has been criticised for issues relating to backtesting. In particular, ES has been found not to be elicitable which means that backtesting for ES is less straight-forward than, e.g., backtesting for VaR. Expectiles have been suggested as potentially better alternatives to both ES and VaR. In this paper, we revisit commonly accepted desirable properties of risk measures like coherence, comonotonic additivity, robustness and elicitability. We check VaR, ES and Expectiles with regard to whether or not they enjoy these properties, with particular emphasis on Expectiles. We also consider their impact on capital allocation, an important issue in risk management. We find that, despite the caveats that apply to the estimation and backtesting of ES, it can be considered a good risk measure. In particular, there is no sufficient evidence to justify an all-inclusive replacement of ES by expectiles in applications, especially as we provide an alternative way for backtesting of ES. |
| Date: | 2013–12 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1312.1645&r=rmg |
| By: | Haas, Andreas; Hofmann, Annette |
| Abstract: | Unternehmen stehen heute aufgrund ökonomischer Anreize verstärkt vor der Entscheidung, die bisher intern gelagerte Datenverarbeitung und Geschäftsprozesse auf einen externen Anbieter von Cloud-Computing-Services auszulagern. Diese neuartige Form des IT-Outsourcings verändert jedoch die Risikosituation, der Anbieter und Nachfrager ausgesetzt sind, teilweise erheblich. Heutige Cyber-Versicherungsprodukte sind noch nicht auf die versicherungstechnischen und vertragsrechtlichen Besonderheiten des Cloud-Computing ausgelegt. Zudem führen die stark interdependenten Netzwerkstrukturen von Cloud-Anbietern, verbunden mit einer fehlenden Unabhängigkeit der Einzelrisiken in einer Cloud-Infrastruktur zu starken Kumulproblemen im Schadenfall und eröffnen Fragen der grundsätzlichen Versicherbarkeit. Die Analyse zeigt, dass neben einer Anpassung heutiger Versicherungsprodukte auch innovative Risikodiversifikationsmöglichkeiten geschaffen werden sollten, um Risiken aus der Nutzung von Cloud-Computing auf ein Versicherungsunternehmen zu transferieren. Dieser Artikel erörtert die Risikosituation bei der Nutzung von Cloud-Services, bietet eine Klassifikation der Risiken an und diskutiert zentrale Fragen der Versicherbarkeit sowie Lösungsansätze für das Risikomanagement. -- Cloud-Computing services are changing the risk situation of IT-outsourcing and represent a challenge for the insurance industry. The most important problem to guarantee insurability of these emerging risks is that they are not stochastically independent. On the one hand, the interdependent network structure of these risks implies a significant contagion risk; on the other hand, new risks emerge that have not been addressed by existing (cyber risk) policies so far. Insurance concepts should be supported by innovative risk diversification concepts for cloud computing service. Addressing and classifying the new risks resulting from Cloud-Computing services, this article discusses insurability issues and risk management solutions. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:fziddp:742013r&r=rmg |
| By: | Theoharry Grammatikos; Robert Vermeulen (LSF) |
| Abstract: | This paper highlights the impact of credit supply and aggregate demand sensitivity on 91 US industries stock performance during the 2007-2009 financial crisis. We account explicitly for changes in the market model and investigate, next to stock returns, the changes in systematic risk and idiosyncratic return induced by the financial crisis. The results show that leverage has a significantly positive effect on systematic risk changes during the financial crisis. After accounting for the change in systematic risk, the crisis induced idiosyncratic return is significantly related to industry leverage and the industry s sensitivity to aggregate demand. A subsequent analysis shows that both leverage and demand sensitivity have economically large effects on industry performance during the crisis. |
| Keywords: | financial crisis, systematic risk, credit supply, aggregate demand |
| JEL: | G01 G12 G32 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:crf:wpaper:12-8&r=rmg |
| By: | Ma, K. (Tilburg University) |
| Abstract: | Abstract: This thesis investigates various issues in regulation, with three chapters on financial fragility and banking regulation, and one chapter on competition policy. Chapter 2 studies banks’ herding driven by their need for market liquidity, highlighting a trade-off between systemic risk and liquidity creation. The model also suggests that systemic risk and leverage are mutually reinforcing, offering an explanation of why banks collectively exposed themselves to mortgage-backed securities prior to the crisis, and why the exposure grew when banks were increasingly leveraged using wholesale short-term funding. Chapter 3 examines the possible trade-off between banking competition and financial stability by highlighting banks' endogenous leverage. Competition is shown to affect portfolio risk, insolvency risk, liquidity risk and systemic risk differently. The model leads us to revisit the existing empirical literature using a more precise taxonomy of risk and take into account endogenous leverage, thus clarifying a number of apparently contradictory empirical results. Chapter 4 presents a model where fire-sales and bank runs are self-fulfilling and mutually reinforcing. With endogenous fire sale prices, the model delivers two new policy insights: First Bank capital can have unintended consequences on illiquidity and contagion, and therefore is not a panacea for financial stability. Second, as acknowledging a crisis aggravates financial contagion, full commitment to regulatory transparency can be suboptimal from a social welfare point-of-view. Chapter 5 is devoted to antitrust policy. It studies how cost asymmetry affects the effectiveness of corporate leniency programs. The analysis shows that using leniency programs involves a trade-off between ex-ante deterrence and ex-post efficiency. For traditional antitrust investigation can both deter cartels and improve allocation, leniency programs should be viewed as a second best solution for budget-constrained antitrust authorities. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:ner:tilbur:urn:nbn:nl:ui:12-5930085&r=rmg |
| By: | Pejman Abedifar (LAPE - Laboratoire d'Analyse et de Prospective Economique - Université de Limoges : EA1088 - Institut Sciences de l'Homme et de la Société); Philip Molyneux (Business School - Bangor University, Bangor); Amine Tarazi (LAPE - Laboratoire d'Analyse et de Prospective Economique - Université de Limoges : EA1088 - Institut Sciences de l'Homme et de la Société) |
| Abstract: | This paper investigates risk and stability features of Islamic banking using a sample of 553 banks from 24 countries between 1999 and 2009. Small Islamic banks that are leveraged or based in countries with predominantly Muslim populations have lower credit risk than conventional banks. In terms of insolvency risk, small Islamic banks also appear more stable. Moreover, we find little evidence that Islamic banks charge rents to their customers for offering Shariá compliant financial products. Our results also show that loan quality of Islamic banks is less responsive to domestic interest rates compared to conventional banks. |
| Keywords: | Islamic banking, Islamic finance, bank risk, credit risk, stability, insolvency, Zscore, rent-seeking. |
| Date: | 2012–05–03 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-00915115&r=rmg |